Whenever oil prices plummet, I have nightmares. Can I lose my job? What will happen to me and my family?
Today, it is not just an academic issue for thousands of workers in the oil fields. And it wasn’t for my father, who lost his job as a construction worker in western New York after the first oil shock in the 1970s.
US oil and gas companies and their employees have been hit hard by the recent collapse in crude oil prices, with the main US benchmark oil price briefly falling below $ 20 a barrel. We are in the midst of the largest decline in global demand for oil ever seen due to the COVID-19 pandemic, the Saudi-Russian price war adding to what was already a massively overburdened US and global market.
Oil-producing states, including Texas, and the federal government are struggling to find a political answer. With the dire financial pain, fear and uncertainty felt by businesses and workers, how should governments help industry overcome this?
By respecting our first principles, the most important.
Our free enterprise system is based on open markets and honest competition. It would be deeply unforeseen and ultimately counterproductive to abandon this system in collusion with OPEC or by supporting the American oil sector with tariffs.
The system is what brought us the shale revolution and made the United States the envy of the world. As a result of this revolution, the United States has become the world’s largest producer of petroleum and natural gas, a major exporter of natural gas and self-sufficient in petroleum for the first time in 70 years.
It was not a national champion who did this; they were independent companies, working resolutely for a competitive advantage.
In our system, investors take risks in the hope of making a return. It’s shale. Business owners in our system have the opportunity to make a lot of money but also to fail. Rewards and risks are two sides of the same coin.
And now the risks come: the reality of the global market is that conventional resources in Saudi Arabia and Russia are cheaper to produce.
Rather than asking for protection from global competition, American industry – and policymakers – should simply seek a fair fight. We have not become the dominant economy in the world by having jockey companies to gain political influence or succeed on the basis of privileged relationships. Competition can be scary, but it is effective in driving efficiency and innovation.
This does not mean that we tolerate anti-competitive behavior at home or abroad more than we do for other sectors. But there are already well-established processes for bringing and trying such cases.
There are, however, cases where other factors must be taken into account. As the trough in American manufacturing capacity a generation ago, the potential damage to the domestic oil and gas industry has economic, strategic, environmental and military implications. All of these are fair to policy makers. For example, regulating the flaring of natural gas co-produced with petroleum can bring significant environmental benefits. And there are clear strategic advantages for the United States, which maintains solid domestic production of oil and gas, which remain the primary sources of energy that drive the US economy.
But we have to set the bar very high, and these factors must clearly outweigh the broader benefits of a competitive system before government intervenes. What would the United States look like today if the horse-drawn car industry had sought government protection from Henry Ford’s Model T, with better performance, cost and environmental impact, and succeeded?
In a changing competitive environment, the government should instead focus on maintaining fair, open and transparent competition. Some businesses will succeed, others will fail, but overall, investors – and the country as a whole – will adapt to new realities and be better off. The ability to fail is one of the secret weapons of our system. Shale rock does not disappear if a producer fails; when the market picks up, the surviving or new businesses can produce these resources when the price justifies it.
But with failure, we need the heart. When my father lost his job, our family was dependent on the government’s social safety net. Thanks to this support, there was a roof over our heads and food on the table. My brothers and sisters and I were able to finish our studies and start a new life in other areas – in my case, in the energy sector. There are many ways for governments and businesses to help workers and families manage in these difficult times.
With a lack of demand for oil, a key factor in the current collapse in prices, the recovery and the functioning of the economy will be done more quickly with a safety net: this limits the bottom of the economy.
Safely managing our recovery from the COVID-19 pandemic and supporting workers and families through this recovery would be the best remedy for the US oil and gas sector.
Mark Finley is a Fellow in Energy and Global Petroleum at the Center for Energy Studies at the Baker Institute for Public Policy at Rice University. Before joining the Baker Institute, he spent over 30 years studying global energy trends for BP and the Central Intelligence Agency.